“Full Monty” Mario

Mario Draghi came as close to the “full Monty” as he possibly could by cutting interest rates 10 basis points to a measly five basis points, and increasing the negative deposit facility rate to -20 basis points. In addition, he promised to begin buying about $400 billion worth of asset-backed securities in about a month.

A Printing Press Is a Terrible Thing to Waste

In essence, short of buying government paper, he has done everything that every other central bank has done, and then some. Every time I think interest rates in the U.S. or Japan are absurdly low I consider the fact that France's 10-year yield is 1.30% and Spain's is 2.17%, and it is obvious that the bond markets of the world are just as mindless (perhaps even more so) — thanks to money printing — as equity markets are.

Never mind that all these policies have served to misallocate capital and have not really done much for economies. Yet central bankers continue to believe that their schemes will work, even if they haven't so far, and therefore they persist in pursuing the same strategies, and they won't stop until some market (most likely bonds) breaks and forces them to. Such a break will have to be a function of the consequences of their actions, i.e., money printing usually makes for weak currencies and inflation, but with so many central banks engaging in QE, no currencies have declined significantly against the others, though the euro did get roughed up today (more about that below).

The Point of Too Many Returns

So now the ECB has officially joined the central banks hell bent on creating inflation (the Fed, the BOE, the BOJ, etc.). It seems only the PBOC would like to have less inflation. One day they will all see their dreams come true, but we won't know it until after they have gone too far. (And for all we know, maybe they already have.)

Thus, just as QE is on track to end in the U.S. it is slated to begin in Europe, and we can only sit back and wait for the moment when the collective height and weight of the U.S. and world stock markets becomes too much for the amount of money being printed. Where that tipping point is can't be predicted, we can only recognize it when (or shortly after) it occurs.

Turning to our stock market's reaction today, the indices gained 0.5% through midday (meanwhile, most European markets were higher by a couple of percent). However, by mid-afternoon the gains were gone and by the close they had turned into small losses. (I guess stock bulls can't win every day, even with “good” news.) Meanwhile, yesterday saw an interesting reversal in the Nasdaq 100 and today the market didn't rally according to script. Wouldn't folks be surprised if stocks tanked from here?

Draghi Teaches Euro the “Down” Command

Away from stocks, Draghi was successful at getting the euro to tumble over 1.5% and it has fallen about 8% in the last four months. That weakness spilled over to the pound and the yen, thus, green paper was essentially the one-eyed man in the land of the blind, as it has been recently. The one interesting development was the fact that the U.S. bond market was a bit weaker, even with European bond markets rallying and the dollar the flavor of the day.

In what can only be described as disappointing action, the precious metals lost 0.5% in the wake of this “new” news. It would seem for the moment that worldwide investor psychology is so completely convinced that money printing works, even Europeans don't feel the need for gold at this moment. However, psychology can turn on a dime, and when it does it can turn big, but as far as Thursday, September 4, goes it can only be labeled a tribute to the madness of crowds and the power of easy money to make market participants believe wholeheartedly in the third financial fantasy of the last 15 years.


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